Know just enough to succeed

(Money Magazine) -- When Andrew Tobias wrote the first edition of "The Only Investment Guide You'll Ever Need" in the late 1970s, investing in the stock market was more like an expensive hobby rather than an everyday requirement of middle-class life.

Tobias's breezy little volume demystified Wall Street and even managed to be funny about it. You've probably read, for instance, that professional stock pickers don't get better results than you'd expect from a monkey throwing darts at stock tables. Well, "if a monkey can invest as well as a professional, or nearly so," Tobias wrote, "it stands to reason that you can too."

Tobias's core advice -- spread your bets, keep your costs low, but before you do anything in the market, save every nickel you can -- has held up through six revisions, the latest of which came out this year. That might explain why he was the top pick by MONEY readers for this month's Visionaries interview.

Tobias spent his career as a writer, not a money manager (he's now the treasurer for the Democratic National Committee). Accordingly, the guide has the quirky touches you'd expect from an enthusiast. Tobias likes index funds a lot but makes the case as well for a stake in, of all things, timber. He also recommends saving money by buying cheap vodka and pouring it into a Grey Goose bottle if you care about impressing guests.

While his may not be quite the only guide you'll ever need, it's certainly one of the most enjoyable. Assistant managing editor Pat Regnier spoke with Tobias at his home in New York City, and Tobias also answered questions from readers. The conversation has been edited.

You got the idea for the first edition of this book while still in your twenties. How did that happen?

I was a writer for New York magazine. I had been to business school, but what did I know? Still, everybody from the receptionists on up to the editor would ask me what they should do with their money.

After being asked the 50th or 100th time, I realized there were some basic things everyone ought to know. And beyond that, knowing a lot more is not necessarily a helpful thing. One of the virtues of the book was it was short -- mostly because I was so flip about things you shouldn't do. The publisher wanted to sell the hardcover for $6.95, but I got them to do it for $5.95 because it would signal that this is a book for everybody.

The early editions even said on the cover, "This book is tax deductible."

Listen, with a 70% [top federal tax rate], we deducted everything!

What's changed about money since 1978? I'm not sure I'd start a book about investing today talking about buying mouthwash by the case, as you do.

I disagree. You're right that inflation is less of an issue, at least for now. Back then it was one more reason to buy in bulk. Still, most people don't have much money. So finding ways to come out a couple of thousand dollars ahead every year still matters. The chapter about saving tips just keeps getting longer.

Have people become better investors since you first wrote the book?

One way people may have gotten better is that they're paying lower transaction costs. Mutual fund loads used to be up to 8.5%; now they're less, and more and more people are using no-loads. More and more people are going into index funds. And, my God, the brokerage commissions! An awful lot of people have gone from paying $300 for a trade down to $8. Of course, if you trade a lot more, you give back some of the gains.

What do you mean when you say that after a certain point, it doesn't help to know more about investing?

If you're using more complex strategies, that implies active trading. Transactions have costs. There are brokerage commissions. You have the spread. And then you have taxes if the trade's not in a tax-free account.

Plus, you are competing with folks who are very smart. You may be smart too, but most people can't compete with the Wharton graduates who do this full-time.

You were an early advocate of the idea that the market is so tough to beat that most folks shouldn't try. But the bubbles of the past decade have shaken people's faith in that.

The market's every bit as hard to outwit as ever -- you can have faith in that. But there are now even better index funds than the ones I used to recommend. With traditional index funds, weighted by market capitalization, you wind up overweighting overvalued stocks and underweighting those that are undervalued.

So I still prefer index funds: With their low fees and terrific tax efficiency, index funds are like horses with 20-pound jockeys running against horses with 200- and 300- and 400-pound jockeys. But in the new edition, I suggest index funds that don't suffer from this weighting flaw. Where the others will perform almost exactly as the indices do, minus a sliver for the fees, these smarter-weighted funds may actually have you beating the indexes in small but, over time, meaningful ways.

Reading your book and your blog, I get the sense you have a taste for speculation when it comes to your own money.

Do I ever. But after decades of frugality, good fortune, and the magic of compound interest, I can afford to take a lot more risk than most people. And I diversify over a lot of nutty speculations, which cuts the risk somewhat. Of course, it's only after they fail that I realize just how nutty they were.

Your book's saving tips are fun, but when I read them I sometimes think, "That's extreme. If that's what it means to be good with money, I'll never get there."

Well, the tips will be more useful to someone who enjoys the game of saving money. But my hope is that even others who don't might still be nudged in the right direction. Most of the things I suggest require no sacrifice, and some of them require less effort, not more. My partner Charles -- we were together 16 years before he died [in January] -- was completely my opposite. I have a $50 Swatch; he had a watch that cost $300 ... to clean. But even he got nudged toward frugality from time to time.

I think a lot of people would rather have more control over their life than less. A lot of this is commonsense stuff. Just knowing that index funds let you beat 80% of your friends and neighbors -- now you're already way above average with money.